Exit and Growth Strategies for Middle Market Businesses

GF Data is out with their Mergers & Acquisitions Report for the second quarter of 2014 and in some ways, it’s status quo and in other ways, not so much. With a scarcity of quality companies for sale and an abundance of both lending capital and investable funds, the tale of the tape is a little bit different this period. Valuations remain consistent with those of Q1, but debt levels have never been greater and a there is a new “look” to the companies that investors are stocking in their portfolios.

As we have mentioned in previous months, a high percentage of companies that have been acquired since 2003 have been “best in class” businesses. These are characterized by above average EBITDA margins and revenue growth. Over the life span of GF Data’s deal sample, 57% of all total deal activity has involved above average quality companies. However, year to date those figures are at 40%, either signaling an anomaly in the chart or a changing of the guard.

If this is indeed a changing of the guard, this is a good sign for middle market business owners who either have been on the market or are considering a sale. Financial investors constantly face the dilemma of needing to put their money to work while mitigating as much risk as possible. Best in class companies foot this bill. But with a scarcity of those companies in the market, they must be finding a way to consider less than perfect candidates. Data has shown that smaller “add-on” deals have become more popular during the post-recession recovery. It is possible that additional relaxed standards have also been adopted leading to a wider pool of potential target companies. If this is the case, this signals a positive trend for middle-market sellers.

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